Daily Management Review

Hitachi To Acquire ABB Power Grids Business For $11 Billion


Hitachi To Acquire ABB Power Grids Business For $11 Billion
The Swiss engineering giant ABB has announced that it would sell a total of 80.1 per cent stake of its power grids business division to Japan’s Hitachi. The company also announced on Monday that shareholders of the company would be returned the net cash of about $7.6 to 7.8 billion that would be derived from the deal.  
According to the Zurich-based company, the power grids business’s enterprise value has been put at $11 billion by the deal and added that the structure and composition of the rest of its business would be modified during and after the deal. Making this announcement, the company said that this restructuring of the rest of the business would lead to about $500 million annual run-rate reductions in costs after accounting for about $500 million in costs for the restructuring.
ABB said that about 19.9 per cent of the power grids business would be retained by it. But the deal also includes an exit option at fair market value and the floor p[rice has been set at 90 per cent of the enterprise value, which can be executed by ABB three years after losing.
Hitachi would be able to boost its global presence in the power grid industry by the acquisition. On the other hand, the aim of ABB from the deal is to get rid of the business unit that has been the least profitable for it and instead focus on new revenue and profit intensive areas such as automation. The company also makes industrial robots.
“Our four newly shaped businesses, each a global leader, will be well aligned to the way our customers operate and focus stronger on emerging technologies such as artificial intelligence,” ABB chief executive Ulrich Spiesshofer said in a statement.
There are about 36,000 people employed in the power grids business unit of ABB and it generated sales of $10.4 billion in 2017. In the third quarter of the current year, the unit generated an operating profit margin of 10.0 per cent which was lower by 60 basis points compared to the same period last year.
This decision of ABB is being seen as a bow down of the company to demands of an activist investor who has been demanding the company sell off the business that manufactures transformers and converters.
The deal would also make Hitachi one of the largest companies in the power grid industry segment.
But this deal is also completely opposite of the plans of ABB Chief Executive Ulrich Spiesshofer, who had pressed for retaining the unit two years ago despite urges of selling it off by investors including Swedish activist investor Cevian which owns 5.34 percent of ABB.
The sale of the business unit by ABB was termed to be the right thing to do for ABB, said Cevian cofounder Lars Forberg.
“Focusing ABB’s portfolio on digital industries and further simplifying the business creates a better company and a strong basis for long-term growth,” he said.